Author and Page information
- by Anup Shah
- This Page Last Updated Sunday, January 17, 2010
- This page: http://www.globalissues.org/article/43/deregulation-or-protectionism.
- To print all information e.g. expanded side notes, shows alternative links, use the print version:
For the neo-liberal, individuals make rational economic and social choices only through the market. For the statist, the state is the sole custodian of society’s interests, and its decisions their only reliable expression, with or without free elections. While the one ideology seeks to subordinate state to market, and the other the market to the state, what both succeed in doing is subordinating society’s will and the means of its expression. The alternative is that both state and market should be the servants of society rather than society being the servant of either. Whether the next century will be marked by unity and harmony rather than division and conflict depends in no small part on what democracy and citizenship are to mean in the age of globalization.
— Brendan Martin, In the Public Interest? Privatization and Public Sector Reform, Zed Books (London), 1993. (Quote used on a Bretton Woods Project report on globalization.)
Protectionism: evil; Economic Liberalization: good — an oversimplification
Protectionism is an economic policy to restrain certain trade through measures such as tariffs, quotas and regulations. It is often used to discourage imports of certain goods and to protect domestic markets in various ways.
Protectionism is often regarded as a barrier to free trade. The word seems to conjure up negative images of isolationism and subsidizing industries that could otherwise not compete fairly against others. (This can help indicate why some industries would strongly support protectionism for themselves.)
Deregulation attempts to free economic activity from binding rules from the state. As a basis of free trade amongst nations, the idea is to allow competition to ensure the most efficient practices prevail, which should average out and benefit everyone.
However, deregulation, when applied to wider parts of society can be at the expense of people in that nation or region if that deregulation means relaxation of environmental rules, health and educational services, etc. In the context of corporate globalization it also risks stifling domestically grown industries as multinational corporations are more likely to have the resources to outcompete local ones. (This hints at the powerful lure that the “freeing” of trade and liberalization of access to resources from regulation has to some proponents.)
[The] moving of money through an economy is why there is so much wealth in a high-wage manufacturing and exporting country and so little within a low-wage country that is “dependent” on imports. With centuries of mercantilist experience, developed societies understand this well.
— J.W. Smith, The World’s Wasted Wealth 2, (Institute for Economic Democracy, 1994), p. 66
Neither seems to answer the notion of fairness, though. Often those nations that promote free trade for all, want protectionism for themselves.
While free trade could be a possible way forward for fair trade, it can only be fair and free if large, developed nations do not continue protectionist practices for some of their industries, while hypocritically requiring (sometimes forcing) developing nations to abandon such measures, to the effect that it tips the trading balance unfairly in their favor.
Some aspects of how protectionism can be used by rich countries include
- intervention in things like technology transfer, or distorting market functions
- providing vast subsidies to local industries (for example, textiles, agriculture, footwear even intellectual property as this report mentions) while asking others to deregulate and become subject to the market’s natural force of supply and demand
- one-sided trade agreements
- even military expeditions to open and expand resource access.
For young industries, protecting and nurturing them can be a positive step, and historically this is how practically all industrialized nations have developed.
It is a much more complex situation that this section could describe alone, but many examples and issues are discussed throughout this web site but the concern is that the same developed nations are pressuring developing nations to aggressively abandon any protectionism, before their economies are ready to enter the global markets (even though protectionism has helped the US and Europe to prosper).
A common misconception in the mainstream (and even dissenting circles) is that one has to be either pro-market or against markets. However, less discussed is how power conflict affects the ideals of a market-based approach or what some of the fundamental problems are in a market or state approaches. Free Trade as an ideology or theory has many valuable and powerful points that have attracted countless supporters. The reality (or what politicians and others might call free trade) can be very different as was suggested in the criticisms of free trade section on this site. Hence, especially in the third world, the form of “free trade” being pushed by rich countries is coming under considerable criticism.
The following quote summarizes quite well that a fundamental issue, such as being pro-poor, transcends a limited debate of being simply pro-market or pro-state:
Consider, for example, the work and philosophy of SEWA, the Self Employed Women’s Association, which operates in Gujarat State in India. SEWA grew out of the long history of organizing textile workers in Ahmedabad, but applied and modified those lessons to organizing women in the informal sector. Starting from an urban base, it has now also expanded to organizing in rural areas (http://www.sewa.org). SEWA’s ground level campaigns, and their national advocacy work, reflects a pragmatism which eschews ideological positions on “state versus market”. They have supported certain types of trade liberalization because they increase the demand for the output and labor of their members. But they have opposed other types of trade liberalization when they hurt, for example, the employment and incomes of the husbands and brothers and fathers of their members. They are strong supporters of deregulating the control of the Gujarat State Forestry Commission on the livelihoods of their members. But they oppose deregulation of the pharmaceutical industry because of the devastating impact of these on basic drug prices, and they support increased regulation in Export Processing Zones to ensure that labor standards are met. Is SEWA pro-state or pro-market? It is difficult to say. What is clear is that SEWA is pro-poor. One of their best known pamphlets is in fact entitled “Liberalizing for the Poor.”
— Ravi Kanbur, Economic policy, distribution and poverty: the nature of disagreements, January 2001
Adam Smith, often regarded as the founder or father of modern free market capitalism with his famous 1776 book, The Wealth of Nations describes England at that time undergoing a transformation and identifying how free markets in some scenarios were very beneficial to prosperity. He also described how mercantilism, big business as well as big government were often detrimental in many cases. Yet, while Imperial Britain may have claimed to take on free market ideology, the free trade imperialism that it was, was to the detriment of other nations, including America, that suffered under its policies of imperialism abroad, which allowed free trade to flourish somewhat domestically.
Depressions resulting in part from laissez faire capitalism and mercantilism led to many European nations turning to protectionism in order to keep competing between themselves. World Wars erupted when their rivalry got too intense and destructive. The American-funded rebuilt Europe, and even the emerging “Asian Tigers”, all followed protectionist measures, and once stable moved towards free markets.
It seems difficult to get the right balance between deregulation and protectionism especially between developed and developing nations. Too much deregulation of certain vital services, some of which could be seen as fundamental rights (such as health and education services) could lead to the inability to provide standards for the full range of the population and less protection for domestic industries against often larger or transnational corporations. On the other hand, too much protectionism could stifle innovation and even foreign investment. The reverse could sometimes occur as well, as many other issues come into play. For example, a regime that might be protectionist but not democratic may still ignore the needs of all the people.
World markets are a source of technology and capital; it would be silly for the developing world not to exploit these opportunities. But globalization is not a short cut to development. Successful development strategies have always required a judicious blend of imported practices with domestic institutional innovations. Policy makers need to forge a domestic growth strategy, relying on domestic investors and domestic institutions. The most costly downside of the integrationist faith is that it is crowding out serious thinking and efforts along such lines.
— Dani Rodrik, The Developing Countries’ Hazardous Obsession with Global Integration, The South Centre, January 8, 2001
Back to top
Industrialized nations developed by protecting and nurturing their industries
Even the likes of China, South Korea, and others became more developed using measures to protect their industries and so on, with various forms of controls.
The era of globalization can be contrasted with the development path pursued in prior decades, which was generally more inward-looking. Prior to 1980, many countries quite deliberately adopted policies that were designed to insulate their economies from the world market in order to give their domestic industries an opportunity to advance to the point where they could be competitive. The policy of development via import substitution, for example, was often associated with protective tariffs and subsidies for key industries. Performance requirements on foreign investment were also common. These measures often required foreign investors to employ native workers in skilled positions, and to purchase inputs from domestic producers, as ways of ensuring technology transfers. It was also common for developing countries to sharply restrict capital flows. This was done for a number of purposes: to increase the stability of currencies, to encourage both foreign corporations and citizens holding large amounts of domestic currency to invest within the country, and to use the allocation and price of foreign exchange as part of an industrial or development policy.
— Mark Weisbrot, Dean Baker, Egor Kraev and Judy Chen, The Scorecard on Globalization 1980-2000: Twenty Years of Diminished Progress, August 2001
If history can be any indicator, developing nations of today could benefit from some aspects of protectionism until they are at the point where they have a good foundation from which to start deregulating certain aspects (not always all) and trade more freely with other nations and regions with a similar foundation, adhering to rules of fairness and some forms of regulation that would ultimately benefit everyone, not just greedy elites!
Instead of developing the Third World, it is clear that the Third World dependency is a policy of the major powers, and the world leaders insist on restricting consumer buying power in the Third World as a price for what is essentially maintenance loans. Meanwhile, these same leaders easily agreed that West Germany must put $1 trillion into the former East Germany to simultaneously build industry, social infrastructure, and markets. And when the relatively poorer countries of Greece, Portugal, and Spain wanted to join the Common Market, these leaders “implemented a 15-year plan which included massive transfers of direct aid, designed to accelerate development, raise wages, regularize safety and environmental standards, and improve living conditions in poorer nations.”… Emerging former colonies receive no such care for their economies to become viable.
— J.W. Smith, The World’s Wasted Wealth 2, (Institute for Economic Democracy, 1994), p. 150
Back to top
Rich countries practicing protectionism at home when it suits
At the beginning of March, 2002, U.S. President George Bush announced tariffs on imported steel from the European Union. He said “We’re a free-trading nation, and in order to remain a free-trading nation, we must enforce law. And that’s exactly what I did. I decided that imports were severely affecting … an important industry.” This is quite remarkable a series of sentences, because on the one hand he is supporting “free trade” but on the other hand, he wishes to protect his industries (which can be an understandable concern), which goes against the notions of free trade! In Europe, this of course has raised a lot of concern, especially when the U.S. has been most vocal in the international arena about getting other countries to open up their markets and embrace free trade.
Bush said the US steel industry which has been hit by rising bankruptcies would be protected a little bit against cheap imports. But the EU, according to the British paper, The Guardian, says that the problems facing the US steel industry come not from imports, which have been declining, but from its failure to make itself competitive during the 1990s.
This highlights important concerns not only about the impacts of protectionism, but also the impacts of free trade, as both in their most literal forms can affect different segments of society in various ways. If other nations decided to impose such tariffs on U.S. or other imports, then there would be even more trade wars. On the one hand, there is an important need to protect developing industries, and create stable internal market economies, while on the other hand, protecting inefficient industries in the heat of competition can have detrimental international ramifications.
The U.S. Farm Bill that followed, likewise has also been a protectionist policy. The developing world has often criticized the double standards of rich regions such as Europe and the United States of demanding (and even forcing) free market ideology and liberalization of the economies of poor countries, but protecting their own industries. One major area of concern has been agriculture which impacts the developing world considerably. In fact while the E.U. rightly pointed out that the U.S. was being protectionist, the E.U. itself has long been highly protectionist itself. Oxfam captures some of this:
We now have the unedifying spectacle of two economic giants locked in a war of words and numbers over agricultural trade policies, each one accusing the other of being more protectionist, while the developing countries are trampled underfoot.
On 13 May 2002, it was the turn of the USA to bring the boot down on developing-country agriculture, when it agreed a Farm Bill which will dole out up to $190bn to US agri-business over the next ten years — an enormous increase of 70 per cent in payments. Before the Bill passed, White House officials admitted that it would greatly encourage overproduction, fail to help US farmers most in need, and jeopardise markets abroad. According to the European Commission, “there is no doubt that the vast bulk of payments under the Farm Bill will go to the largest agri-businesses”. Third World producers will find it harder to sell to the US market and, since the USA exports 25 per cent of its farm production, they will find it harder to sell in other international markets or to resist competition from US products in their home markets. The disposal of increased US surpluses as 'food aid' is likely to compound the loss of livelihoods.
— Europe’s Double Standards. How the EU should reform its trade policies with the developing world, Oxfam Policy Paper, April 2002, p.12 (Link is to the press release, which includes a link to the actual Microsoft Word document from which the above is cited.)
New York Times columnist and professor, Paul Krugman, a free market supporter, and often a harsh critic of anti-corporate globalization protest movements, has been quite critical of U.S. policies, which he describes quite bluntly as being protectionist:
Some months ago an academic colleague — a man with strong Democratic connections — urged me to write a couple of columns praising the Bush administration. “What should I praise?” I asked.
There was a long pause — funny, isn’t it, how “balance” becomes a goal in itself? — but eventually he came up with something: “How about its commitment to free trade?”
Ahem. In fact, George W. Bush has turned out to be quite protectionist. The steel tariff and the farm bill attracted the most attention, but they are part of a broader picture that includes the punitive (and almost completely unjustified) tariff on Canadian softwood lumber and the revocation of Caribbean trade privileges. When it comes to free trade, the Bush administration is all for it — unless there is some political cost, however small, to honoring its alleged principles.
— Paul Krugman, The Rove Doctrine, New York Times, June 11, 2002
Chief researcher of the international development organization Oxfam, Kevin Watkins, has been very critical of U.S., European and Japanese trade policies, even charging them with hypocrisy for preaching free trade but practicing mercantilism:
Looking beyond agriculture, it is difficult to avoid being struck by the discrepancy between the picture of US trade policy painted by [US Trade Representative, Robert] Zoellick and the realities facing developing countries.
To take one example, much has been made of America’s generosity towards Africa under the Africa Growth and Opportunity Act (AGOA). This provides what, on the surface, looks like free market access for a range of textile, garment and footwear products. Scratch the surface and you get a different picture. Under AGOA’s so-called rules-of-origin provisions, the yarn and fabric used to make apparel exports must be made either in the United States or an eligible African country. If they are made in Africa, there is a ceiling of 1.5 per cent on the share of the US market that the products in question can account for. Moreover, the AGOA’s coverage is less than comprehensive. There are some 900 tariff lines not covered, for which average tariffs exceed 11%.
According to the International Monetary Fund (IMF), the benefits accruing to Africa from the AGOA would be some $420m, or five times, greater if the US removed the rules-of-origin restrictions. But these restrictions reflect the realities of mercantilist trade policy. The underlying principle is that you can export to America, provided that the export in question uses American products rather than those of competitors. For a country supposedly leading a crusade for open, non-discriminatory global markets, it’s a curiously anachronistic approach to trade policy.
— Kevin Watkins, Trade hypocrisy: the problem with Robert Zoellick, Open Democracy, December 12, 2002
Watkins lists a number of other areas, besides the AGOA that are beset with problems of hypocrisy, and concludes that “nihilism and blind pursuit of US economic and corporate special interest represents an obstacle to the creation of an international trading system capable of extending the benefits of globalization to the world’s poor.”
Back to top
Can developing countries avoid rich country strangle-hold?
A strategy for developing countries may be in deciding which industries to nurture (temporarily) and which sectors to further liberalize sooner.
As Akyüz mentioned further above, a number of realities can impact the otherwise appealing free trade ideas, including externalities, incomplete markets, imperfect and asymmetric information, monopolies or imperfect competition.
Akyüz also added that even if liberalization was followed in the manner the rich countries asked, it is not guaranteed that it will result in progress for all within a nation. Higher income could result, but social inequalities could remain. The US and UK are arguably the most liberal in their domestic economic policies, and while there are clear advantages in some sectors, social inequalities and related problems are generally higher in these economies than most other industrialized nations.
Developing countries may have a case for nurturing some of their industries rather than opening their economies to competition with multi-nationals. However, in some scenarios this could also be inefficient.
For example, mobile phone companies are helping people throughout Africa to connect to each other and even stimulate economic activity. For most African countries it perhaps makes sense to let such businesses in, rather than trying to develop their own, due to lack of resources and technological base. Yet, at the same time, if this is followed, how will African nations break out of that chain? What if African nations could be more economically efficient with this technology?
There is often talk of technology transfer and partnerships between a multinational company and a local business/industry. However, would a multinational want to create real competition for itself and risk shutting itself out of a market, or having to compete with a local business that might be better placed to respond to the local customs and culture?
Political factors will also be prevalent. For example, many nations will see food security as crucial and even if other countries may be more efficient producers of some food items, a nation may decide to grow some of their own and support their farmers. Even if this seems inefficient from an economic perspective, factoring in geopolitics and actions by the rich nations such as food dumping, manipulative foreign aid and first world farm subsidies may make other nations factor in political terms.
The idea of breaking away from dependency, especially from the first world, was prevalent during the wave of anti-colonialism and the breaks for freedom post World War II. At the same time, many economists argue that inter-dependency through trade can also be a good thing; nations trading that which they are not themselves efficient at producing, and when done in a fair and just environment, leads to cooperation.
However, many developing countries are suspicious of first world nations’ intentions, whether it is geopolitics, help with debt, foreign aid, or more.
Could regional free trade, whereby trade is amongst nations of similar levels of development, be an even better option in that context?
These and many other options all need consideration by policy makers in developing countries. However, they need to make those decisions in an accountable manner. Even though many developing countries are democracies, or democratizing, there are many problems such as corruption, inappropriate influence from outside (including from rich countries), lack of resources, and so on. In so many cases, as discussed in this site’s sections on debt, G8, and foreign aid, rich nations and institutions end up leading or dictating the manner in which developing countries should develop, leading to less accountable, and often inappropriate, decisions.
Back to top
Link to this page from your site/blog
Find this page/site useful?
Author and Page Information
- by Anup Shah
- Created: Monday, September 07, 1998
- Last Updated: Sunday, January 17, 2010